Cumberland: Munis Are a ‘Much Better Relative Buy’ Now

By Amey Stone

After a stellar 2015, municipal bonds didn’t look like such a good deal at the start of this year compared to Treasuries. As Treasury yields have fallen, that’s changing.

“The municipal market now is a much better relative-value buy than it was at the close of 2015,” writes John Mousseau, director of fixed income at Cumberland Advisors in a Wednesday commentary.

Munis, had a good first quarter, with yields falling across category. Supply has remained low, especially compared to the first quarter of last year when there was a “supply glut” because so many municipalities refinanced. Plus, demand increased. Mousseau exlains:

There was the normal year-end rollover demand from maturing bonds, called bonds, and coupon payments. However, the equity markets’ extreme volatility at the start of 2016 resulted in some asset reallocation into the bond market, also experienced by municipal bonds.

But Treasury yields fell even faster and muni yields started to turn up this month. Cumberland is using a barbell approach and likes longer-term munis. Mousseau writes of new issues:

There have been a number of issues that have come to market with AA ratings or higher and yields of 4%. This is a Muni/Treasury yield ratio of nearly 150%, and we are still embracing this mismatch.

He notes the after-tax returns look especially appealing:

Take into account a top Federal marginal tax rate of 39.6% and the Obamacare tax of 3.8%. At those rates, a 4% tax-free yield is over 7% taxable equivalent, and even more if state taxes are taken into account.

One risk Mousseau is keeping an eye on — financial problems in Puerto Rico and Chicago.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.